How to reduce risks when investing in cryptocurrency?

The digital asset market is subject to high volatility, so experts recommend using special tools that reduce the likelihood of losing investments.

Cryptocurrency is a highly volatile asset, when investing in which there are always risks of losing your savings, Investors use a variety of tools to help mitigate these risks, such as diversification.

By dividing the investment portfolio into assets with low correlation, it is possible to secure investments from fluctuations in quotations.

There are other ways that you can help reduce the risks when buying digital assets.

Avoid haste and greed

During periods of strong volatility and rapid growth of cryptoassets, traders begin to trade “with an accelerated pulse,” said Vadim Koleoshkin, co-founder of the Zerion platform. In his opinion, this is caused by uncertainty, fear of lost profits (FOMO) and greed.

Active trading during such periods can lead not only to a loss of funds, but also to a deterioration in health, the expert said.

“I think health is definitely not worth the lost profit,” said Koleoshkin.

In order not to become a hostage to the market, you need to formalize a strategy for yourself in writing and just follow it, and after some time determine the results and adapt it, advises the co-founder of the Zerion platform.

Even a simple sign indicating the moment of entry, the estimated period of the investment, the expected result and the exit option will be enough not to chase lost profits so much.

FOMO stands for Fear of Missing Out. The term refers to situations where the fear of missing out on opportunities or some valuable resource becomes the reason for certain actions.

Don’t use a lot of leverage

In an effort to earn $ 1 million here and now, with a deposit of $ 1,000, investors use leverage of 100x, and sometimes even more, explained Mikhail Karkhalev, financial analyst of the Currency.com crypto exchange.

According to him, in this case, one corrective candlestick that does not change the intraday trend is enough – and the deposit is lost.

“For the crypto market, 5x leverage is already quite high risk, although 10x-20x leverage can work well in the foreign exchange market,” the analyst added.

Hedge risks with leverage

According to Mikhail Karkhalev, leveraged trading can be utilized as a hedging instrument in specific instances. For example, if the price of an asset begins to fall after you acquire bitcoin for the long term, you can establish a short position with a small leverage and recoup your losses, according to a financial expert at the cryptocurrency exchange Currency.com.

“To put it simply, leverage is a tool that needs to be used where it is appropriate,” the analyst said.